Thinking Economically: Texans Seeking Real Budget Solutions

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The Wall Street Journal recently reported, "States are moving to cut jobs and other spending to close budget deficits, even though their protracted fiscal crisis is easing a bit in an improving economy." Commenting on this, Delaware Gov. Jack Markell, a Democrat who serves as vice-chairman of the National Governors Association, said, "I think the new normal is that we are every single year going to have to be very much focused on wringing efficiencies out."

It appears we are beginning to get bipartisan agreement on the importance of keeping the growth of government spending in check. And just in time, as Texas moves closer to deliberating perhaps the most important budget it has ever adopted.

To this end, the Foundation joined today with other groups in the Texans for a Conservative Budget coalition to release Real Texas Budget Solutions: 2013 and Beyond. This plan provides a road map for achieving short-term budget savings ($9.4 billion over the next three years) and implementing long-term spending reforms that will help Texas balance its budget in 2013 and beyond without raising taxes or fees, or seeking out other means of raising new revenue.

Certainly, 2003 and 2011 were important milestones in controlling spending growth in Texas. But as I'll show below, the spending restraint that accompanied the budget shortfall in 2003 gave way to higher spending in sessions afterward, resulting in another budget shortfall in 2011. If we are going to get Texas back on long-term, sound economic footing, we will need a second consecutive session of spending restraint in 2013. That's the purpose of our Real Texas Budget Solutions.

While some might criticize this as an "austerity budget" as we are currently seeing over in Europe, it is anything but that. States that move "to cut jobs and other spending to close budget deficits" actually increase prosperity by allowing for the creation of even more jobs in the private sector economy. The difference between government jobs and private sector jobs is important.

Government jobs exist only because a few people in government think they should exist, and they are paid for by money taken from citizens through taxes. Private sector jobs, though, exist because millions or even billions of consumers think they should exist in order to meet their needs, and those same people pay for those jobs voluntarily out of their own pockets through the purchase and consumption of goods and services.

In other words, controlling government spending leads to more jobs that better serve the people who are paying for them while letting more workers keep more of what they earn. It is the path to prosperity.

However, those people think that Texas already did too much trimming of its budget last session are even now calling on the Legislature to "restore" funding to schools and other programs. Before we go too far down this road, however, let's take a look at what actually happened last session.

There was much debate last year about the actual size of this biennium's revenue shortfall. The Foundation's Center for Fiscal Policy pegged it at about $15 billion, while advocates for higher spending claimed it was about $27 billion-the state's Legislative Budget Board supported that figure as well. But looking back now, the numbers back up our $15 billion estimate.

The Legislature appropriated $86.9 billion in 2009 out of GR/GRD funds for the 2010-11 biennium. For 2012-13, they appropriated $87.6 billion-an increase of $700 million. And appropriations from other funds (including the State Highway Fund, the Texas Mobility Fund, trust funds, bond proceeds, etc.) increased by $1.5 billion from the previous session. So overall appropriations from state funds session to session is up this biennium by about $2.1 billion. Of course, there was an $11 billion decrease in appropriated federal funds. This would point to about a $9 billion revenue shortfall. However, Texas actually received quite a bit more federal funds than we originally estimated, which would bring the federal revenue shortfall to about $18 billion.

Adding it all up, Texas' overall revenue shortfall this biennium fell between $9 billion and $16 billion. And with state revenue growing faster than expected, that number is likely to decrease. So $15 billion seems right on the mark, or perhaps even a little high.

Now let's look at spending.

To deal with the revenue shortfall, Texas took several steps. One thing we did (as seen below) was pretend that more than $6 billion of education and Medicaid spending did not exist. We also came up with about $500 million in in one time revenue, borrowing much of that from next biennium. And we also engaged in $4.3 billion worth of deficit spending by using unexpended balances to balance the budget. The table below shows the details:

So depending on how you account for these, Texas used between $6.2 billion and $11 billion of budget gimmicks, revenue enhancements, and deficit spending to deal with a $15 billion or so revenue shortfall. This means spending cuts were far less than the actual shortfall. This can be seen in total state spending for the last three biennia:

When we add in the $6.2 billion for the Foundation School program and Medicaid that we deferred until 2013 and are going to spend (we just haven't appropriated the money yet), spending this biennium decreased only about $8 billion from 2010-11, or about two percent per year. Looking at it another way, spending this biennium will be up $7.5 billion from 2008-09, about a one percent annual increase in spending from 2008 to 2013.

So while conservatives cannot creditably claim that the state has recently engaged in runaway spending, neither are liberals accurate when they claim we took an ax to the budget.

The one thing that stands out clearly from these numbers is that the main reason that Texas faced a revenue shortfall in 2011 was that we used federal stimulus funds to spend beyond our means in 2009.

Of course, there have been winners and losers in this battle. Advocates for limiting the growth in government spending-like the Foundation-have to be pleased with the recent one percent annual increases. But we can't rest on our past successes.

Going forward, everyone agrees that as the economy recovers the Legislature is going to have more revenue available in 2013 than it did in 2011. So spending is likely to increase again in 2014-15. The question is, will the Legislature keep spending within available revenue, or will it seek to somehow increase revenue?

If we are going to live within available revenue, we won't be able to pay for every program at its current level and come up with the $12 billion or so needed to reconcile the old budget gimmicks and pay for federally-mandated Medicaid caseload growth. So we are going to have to find some real savings in 2013. Otherwise, it is hard to see how we avoid tax and fee increases.

But avoiding them is precisely what we ought to do. Reigning in government spending is at the heart of expanding economic freedom. Less spending means less taxes and less regulation. It means more jobs and greater prosperity. And it means a more charitable population with more resources to help others in need.

Texas has proven many times that economic freedom is the only way to actually accomplish the compassionate goals that many people seek to accomplish with government. It's time to prove it once again.